Natural disasters can affect sovereign ratings – Moody’s

EMERGING economies like the Philippines are significantly more exposed than developed countries to natural disasters and this could have repercussions on a sovereign’s creditworthiness credit rater Moody’s Investors Service said.

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Overall, $1.6 trillion of damage occurred in a developed world during the past 35 years, compared to less than $900 billion damage in emerging and developing countries, Moody’s said in a report analyzing the exposure to natural disasters of its 125 rated sovereigns.

However, it noted that developing countries, especially small island states, are significantly more exposed than developed countries in terms of damage as a percentage of gross domestic product (GDP).

“Comparing the number of people affected by natural disasters as a percentage of national total population and the direct damage from natural disasters as a proportion of national GDP across countries, we find that emerging markets suffer eight times more in terms of the average share of population affected, and five times more in terms of direct damage as a share of GDP, compared to developed markets,” it said.

The debt watcher found that over the 1980 to 2015 period, the average annual damage from natural disasters was 1.5 percent of GDP in emerging markets against 0.3 percent of GDP in developed economies. It added that the average share of affected population over the same period was 3 percent in emerging markets against 0.4 percent in developed economies.

“Asia is the most affected region in terms of natural disaster occurrence and affected population, due to its geographic features and population density,” it said.

Moody’s said these extreme events are typically associated with a fall in economic output, as well as deteriorating external and fiscal balances. Debt-to-GDP ratios also rise as sovereigns increase their borrowing to help finance reconstruction efforts.

“Natural disasters can also increase poverty as they tend to have a disproportionate impact on the poorer parts of the population,” it pointed out.

Furthermore, the credit ratings agency said a recent study of contingent liabilities by the International Monetary Fund showed that natural disasters have been the second-leading cause of materialization of contingent liabilities for emerging market sovereigns—after banking crises–as the government has typically acted as a (re)insurer of last resort, without knowing precisely its disaster risk exposure.

“Contingent liabilities may include losses incurred on government assets and emergency response and recovery. Occasionally, political and social pressure may also lead the government to accept additional liabilities after a major disaster, despite initial limited government responsibility,” it said.

The report also showed that in addition to being more exposed to natural disasters, emerging economies are also less insured against them.

Citing data from reinsurance company Swiss Re, it said over 40 percent. of the direct losses from natural disasters are insured in developed countries, while less than 10 percent of losses are covered by insurance in middle-income countries and less than 5 percent in low-income countries.

“Private sector (re)insurance plays an important role in mitigating the adverse impacts of natural disasters in advanced economies. In contrast, developing countries rely on their governments for post-disaster relief, which places a heavy burden on public finances and gives rise to sovereign contingent liabilities,” it noted.